Obama Planning to Slash Deficit, Despite Stimulus Spending

After a string of costly bailout and stimulus measures, President Obama will set a goal this week to cut the annual deficit at least in half by the end of his term, administration officials said. The reduction would come in large part through Iraq troop withdrawals and higher taxes on the wealthy.
Mr. Obama’s budget outline, which he will release on Thursday, will also confirm his intention to deliver this year on ambitious campaign promises on health care and energy policy.

The president inherited a deficit for 2009 of about $1.2 trillion, which will rise to more than $1.5 trillion, given initial spending from his recently enacted stimulus package. His budget blueprint for the 2010 fiscal year, which begins Oct. 1, will include a 10-year projection showing the annual deficit declining to $533 billion in the 2013 fiscal year, the last year of his term, officials said.

While that suggests a two-thirds reduction, exceeding Mr. Obama’s goal of at least half, advisers note that the current deficit as a starting point is inflated by one-time expenses to stimulate the economy.

Measured against the size of the economy, the projected $533 billion shortfall for 2013 would mean a reduction from a deficit equal to more than 10 percent of the gross domestic product — larger than any deficit since World War II — to 3 percent, which is the level that economists generally consider sustainable. Mr. Obama will project deficits at about that level through 2019, aides said.

In his weekly radio and Internet address on Saturday, Mr. Obama said his first budget was “sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don’t, and restoring fiscal discipline.”

“We can’t generate sustained growth without getting our deficits under control,” he added.

The president will propose to tax the investment income of hedge fund and private equity partners at ordinary income tax rates, which are now as high as 35 percent and could return to 39.6 percent under his plans, instead of at the capital gains rate, which is 15 percent at most.

Senior Democrats in Congress joined with Republicans in 2007 to oppose that increase. But with Wall Street discredited and lucrative executive compensation a political target, the provision could prove more popular among lawmakers.

Mr. Obama will also call for letting the Bush tax cuts on income, dividends and capital gains lapse after 2010 for individuals who make more than $250,000 a year. But while the top rate for income would rise to 39.6 percent, the top rate for capital gains and dividends would be 20 percent.

As a candidate, Mr. Obama called for immediately repealing those tax cuts. He decided instead to keep them in place through 2010, as scheduled, reflecting the widespread belief that raising taxes further depresses economic activity.

As for war costs, Mr. Obama’s campaign projected that withdrawing combat troops from Iraq would save about $90 billion a year. But it is not clear how much any savings would be offset by increased spending in Afghanistan, where Mr. Obama has ordered an additional 17,000 troops, bringing the total there to 56,000.

The budget will provide the first clues to how Mr. Obama will reassert fiscal discipline after signing into law a $787 billion economic recovery plan. As difficult as cutting the deficits will be, much of the reduction by the end of his term will simply reflect an end to spending from the two-year stimulus package and — assuming the economy recovers — higher tax revenues and lower expenditures for safety-net programs like unemployment compensation.

Mr. Obama will propose cutting a variety of programs, including the Medicare Advantage subsidies for insurance companies that cover seniors who can otherwise acquire health coverage directly from the government. Another target is spending on private contractors, especially for defense, which spiked during the Bush administration. And he will scale back some promises, including his proposal to double money for foreign aid.

The budget on Thursday will come amid a week of reminders of the nation’s fiscal plight. On Monday Mr. Obama will hold a “fiscal responsibility summit” at the White House with members of Congress from both parties, economists, union leaders and business representatives. On Tuesday he will make a televised address to a joint session of Congress — the equivalent of a State of the Union speech for a new president — that advisers said would focus on the economy. Meanwhile, Congress will debate $410 billion in overdue appropriations for this fiscal year.

Yet Mr. Obama will inflate his challenge by forsaking several gimmicks that President Bush used to make deficits look smaller. He will include war costs in the budget; Mr. Bush did not, and instead sought supplemental money from Congress each year. Mr. Obama also will not count savings from laws that establish lower Medicare payments for doctors and expand the alternative minimum tax to hit more taxpayers — both of which Mr. Bush and Congress routinely took credit for, while knowing they would later waive the laws to raise doctors’ payments and limit the reach of the tax.

Full details of Mr. Obama’s budget for the 2010 fiscal year will be released in April. The outline on Thursday will make clear that he intends to push ahead on promises to contain health care costs and expand insurance coverage, and to move toward an energy cap-and-trade system for controlling emissions of gases blamed for climate change.

“The president believes there are essentially three areas that have to move forward even as we pare back elsewhere — health care, energy and education,” said David Axelrod, his senior adviser. “These are the bulwark of a strong economy moving forward.”

While some people have predicted that Mr. Obama would have to shelve his priorities given rising deficits, his determination to proceed, especially on health care, reflects his economic advisers’ conviction that the government cannot control its finances without reforming health care. The ballooning cost of health care, and thus Medicare and Medicaid, is the biggest factor behind projections of unsustainable deficits in coming decades.

“He wants to present an honest budget, he wants to focus on health care, and he will cut the deficit by at least half by the end of his first term,” Peter R. Orszag, director of the White House Office of Management and Budget, said in an interview.

Mr. Obama will suggest in his budget that expanding health coverage to the more than 46 million uninsured can be done without adding to the deficit, both by making cost-saving changes in the delivery of care and by raising revenues. Advisers declined to identify the tax source.

Changes to the health care system will require investments in disease prevention programs, health information technology and research on cost-effective treatments, among other steps. Some money was included in the stimulus package. Even so, many health analysts believe big savings cannot be realized soon.

On energy policy, Mr. Obama’s budget will show new revenues by 2012 from his proposal to require companies to buy permits from the government for greenhouse gas emissions above a certain cap. The Congressional Budget Office estimates that the permits would raise up to $300 billion a year by 2020.

Since companies would pass their costs on to customers, Mr. Obama would have the government use most of the revenues for relief to families to offset higher utility bills and related expenses. The remaining revenues would cover his proposals for $15 billion a year in spending and tax incentives to develop alternative energy.
By JACKIE CALMES
Source-Ney York Times

U.S. Tries a Trillion-Dollar Key for Locked Lending

Credit cards, home equity lines, student loans, car financing: none come cheaply or easily in these credit-tight times. The banks, the refrain goes, just will not lend money.

But it is not simply the banks that are the problem. It is also what lies behind them.
Largely hidden from view is a vast financial system that serves as the banker to the banks. And, like many lenders, this system is in deep trouble. The question is how to fix it.

Most banks no longer hold the loans they make, content to collect interest until the debt comes due. Instead, the loans are bundled into securities that are sold to investors, a process known as securitization.

But the securitization markets broke down last summer after investors suffered steep losses on these investments. So banks and other finance companies can no longer shift loans off their books easily, throttling their ability to lend.

The result has been a drastic contraction of the amount of credit available throughout the economy. By one estimate, as much as $1.9 trillion of lending capacity — the rough equivalent of half of all the money borrowed by businesses and consumers in 2007, before the recession struck — has been sucked out of the system.

Banking chiefs, who have come under sharp criticism for not making more loans even as they have accepted billions of taxpayer dollars to prop themselves up, say it is the markets, not the banks, that are squeezing American borrowers.

The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.

The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March.

But analysts question whether this approach will be enough to unlock the credit that the economy needs to pull out of a deepening recession. Some worry it may benefit only select investors at taxpayer expense.

The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.

Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

In the initial phase, the Treasury will provide $20 billion and the Fed will provide $180 billion. Treasury Secretary Timothy F. Geithner said last week that the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion.

Investors and economists said that the effort could help restore some lending, but added that it might not be big enough to fully replace all or most of what has been lost, especially if the nation’s biggest banks are not restored to health.

“The gap to be made up is huge,” said Hyun Song Shin, an economist at Princeton who has written extensively about the shadow banking system. “Ideally, you would like the commercial banking sector to step up and take charge of the train but they are in no position to do that because they are undercapitalized.”

The market for new securities backed by mortgages and other types of loans has collapsed. Last year, investors bought $313.9 billion of these securities, down from $1.6 trillion in 2007 and $2.1 trillion in 2006, according to Dealogic.

Last month, banks issued just $1.6 billion worth of such deals.

Banks and finance companies are holding more loans on their books, but their ability to do so has been eroding as losses rise on their existing assets. Since October, banks’ holdings of loans and leases have shrunk by 2 percent, to $7.1 trillion.

In the mortgage market, banks own just one-third of all loans, down from half as recently as 1990.

Investors and bankers say the Treasury program, called the Term Asset-Backed Securities Loan Facility, or TALF, could help unclog vital channels of capital, but they add that it is hard to know how big an impact it will have.

For one thing, the Fed will make loans against only triple-A rated securities, not lower-rated bonds, which are first to suffer losses when borrowers default on loans. That will not help banks sell junior bonds, which many investors have shunned because of fears that losses would rise as the economy worsened, said Thomas H. Atteberry, a partner at First Pacific Advisors, an investment firm based in Los Angeles.

“It’s probably a step forward but it may only be a baby step forward,” said Mr. Atteberry, who does not plan to use the TALF.

Jerry Marlatt, a partner at the law firm of Clifford Chance who specializes in securitization, said that lenders using the TALF would be willing to retain more of the risk associated with loans on their own books to get deals done. That should help ensure that lenders make better-quality loans in the future, because they will be liable for most of the losses.

Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund, said many people might take a dim view of the TALF program because it provided government subsidies to investors like hedge funds. Investors who borrow from the Fed could enjoy annual returns of 20 percent or more.

“The TALF,” he said, “raises a lot of questions.”

By VIKAS BAJAJ
Published: February 19, 2009
Source-New York times

$275 Billion Plan Seeks to Address Housing Crisis

President Obama announced a plan on Wednesday to help as many as nine million American homeowners refinance their mortgages or avert foreclosure, saying that it would shore up housing prices, stabilize neighborhoods and slow a downward spiral that was “unraveling homeownership, the middle class and the American Dream itself.”
The plan, which was more ambitious and expensive than many housing analysts had expected, drew praise from consumer advocates as well as the financial industry.

It could ultimately cost taxpayers as much as $275 billion — $75 billion in direct spending to keep people in their homes and the rest in additional financial backing for the government-controlled mortgage giants, Fannie Mae and Freddie Mac.

But analysts and administration officials alike cautioned that it would not come close to halting the tidal wave of foreclosures. Nor would it provide much help to millions of homeowners who are “under water,” or holding mortgages that are bigger that the market value of their houses.

“This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” Mr. Obama told a crowd here, in one of the communities hardest hit by the housing crisis. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

Almost one in 10 home mortgages is either delinquent or in foreclosure, and analysts estimate that at as many as six million families could lose their homes over the next three years in the absence of government action.

The plan has three components. The first would help homeowners who are still current on their payments, but who are paying high interest rates and cannot refinance because they do not have enough equity in their homes, a problem afflicting growing numbers of people as housing values tumble.

A second component would assist about four million people who are at risk of losing their homes. It would provide incentives to lenders who alter the terms of loans to make them affordable for the troubled borrowers. A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.

Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.

The banking industry has vehemently fought that proposal for more than a year, saying it would make investors unwilling to finance future mortgage lending. But Democrats in Congress strongly support the idea and banking executives are putting up less resistance than before.

Republican lawmakers reacted cautiously to Mr. Obama’s plan. Representative John Boehner of Ohio, the House Republican leader, called it “an important step,” but raised questions.

“Does your plan compensate banks for the bad mortgages they should never have made in the first place?” Mr. Boehner asked. “Will individuals who misrepresented their income or assets on their original mortgage application be eligible to get taxpayer-funded assistance?”

Mr. Obama’s announcement came a day after he signed his $787 billion economic stimulus package, and administration officials said that the initiatives would work in tandem to stabilize the economy.

The plan will take effect March 4, when the administration publishes detailed rules explaining it.

Except for the provision that empowers bankruptcy judges, almost all the other elements can be enacted by Mr. Obama without further action by Congress.

To help the estimated four million homeowners in danger of foreclosure, Mr. Obama will create a $75 billion program to subsidize loan modifications that would reduce a family’s monthly payment to as little as 31 percent of its gross monthly income.

As envisioned, a mortgage lender would have to first make enough concessions to reduce a borrower’s payments to 38 percent of monthly income. To encourage lenders, the government would offer incentives, like a $1,000 upfront payment for every loan modified and more payments if the borrower stays current.

If the lender gets the monthly payments down to 38 percent of the borrower’s monthly income, the government would then match, dollar for dollar, additional reductions to bring the payment as low as 31 percent of monthly income.

The changes could be accomplished in several ways, from stretching out the repayment period of a loan to reducing the interest rate or reducing the outstanding principal.

But analysts noted that lenders, or the mortgage-servicing companies that administered the loan, would still have the last word on whether to make concessions. If a lender decides that the cost of the concessions is higher than the cost of foreclosing, even with the government subsidies, then a borrower would probably still lose the property.

A potentially big limitation on the rescue portion of Mr. Obama’s plan involves second mortgages. To avoid the need for a down payment, or to minimize the down payment, millions of people bought homes with piggy-back mortgages that went alongside the primary mortgages.

Administration officials said on Wednesday that their plan to help homeowners facing foreclosure did not deal with second mortgages. Because those second mortgages were often made by a different lender than the first mortgages, that could greatly complicate negotiations over a loan modification.

To help homeowners who can still keep up with their payments, but who may resent the idea of rescuing others, Mr. Obama’s plan would make it easier to refinance at today’s very low interest rates.

The plan would apply to people with fairly traditional loans that are owned or guaranteed by Fannie Mae and Freddie Mac — about 30 million homeowners. The new loans would not be subsidized, but borrowers would not need to have a 20 percent equity stake in the house.

Normally, Fannie Mae and Freddie Mac require that such borrowers pay private mortgage insurance, which can add hundreds of dollars to a monthly payment. Administration officials estimated that this portion of the plan could help 4 million to 5 million borrowers.

The big limitation of the refinancing portion of the plan is that it would not help most borrowers who are current, but under water. It would only be available for mortgages that are not more than 5 percent above the current market value of the house. Mark Zandi, chief economist at Moody’s Economy.com, estimated that the plan would help less than a million of the 14 million homeowners who are under water.

A third, more vague component of the plan is aimed at propping up the mortgage market as a whole by having Fannie Mae and Freddie Mac step up their purchases of mortgages and mortgage-backed securities.

Sheryl Gay Stolberg reported from Mesa, Ariz., and Edmund L. Andrews from Washington. Source-New York times

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Details for $8,000 Tax Credit….

Tax credit of 10% of the purchase price up to $8,000
Credit only valid for first-time homebuyers purchasing principal residence
Credit can be applied to purchases made from 1/01/09-12/01/09
Home purchased must be principal residence for 3 years or credit will be recaptured
Only applies when taxable income for the year is less than $75,000 (file single return) or 150,000 (file join return)

Are Lower Mortgage Rates Working? For Some, Yes; for Others, No

By Cami Joner

RISMEDIA, February 17, 2009-(MCT)-Low mortgage rates could be a big help to first-time home buyer Nicole Landstrom, who expects to close a sale on a three-bedroom starter in Vancouver this month.

With 30-year mortgage interest rates hovering at 5% since mid December, she just couldn’t wait any longer to buy, said Landstrom, 25, who spent months looking for her first house. She has watched home prices decline and interest rates drop significantly since beginning her search.

“I’m hoping to get a 4.75 (percent) or 5 (percent) rate, but it’s not locked in yet. Each point would increase my monthly payment by $50,” said Landstrom, a floor manager for Costco.

January applications for new and refinanced home loans reached a record high for Wells Fargo Home Mortgage Group, which processed 477 applications, up from 299 applications the same month last year, said Doug Grenz, an area sales manager who oversees teams throughout Oregon and Southwest Washington.

However, while the low mortgage rates seem to be helping new home buyers such as Landstrom, many of those who want to refinance and take advantage of the lower-rate mortgages are being turned down, especially if they purchased at the height of the housing market run-up. For these home owners, appraisals for their new loans often show home values that have dropped from the original selling price.

“We hear of more situations where the appraised value is less than the customer may owe on their mortgage,” Grenz said.

Declining values

Slow home sales and declining prices are the root of the problem in Clark County, where the total number of home sales in 2008 dropped to 5,133 in 2008, down from 7,613 in 2007 and about half as many as the 10,137 homes sold here in 2006, according to “benchmarks,” which publishes data for Vancouver-based appraisal firm Riley & Marks.

Last year’s sales were the lowest in the past 15 years.

Homes here sold for a median price of $249,900 in June 2008, a 6.6% drop from June 2007 when the median was $267,500. By December 2008, the median price-half sold for more, half for less-was $234,450 in Clark County.

Some desperate home sellers continue to lower their asking prices, while the number of short sales-in which the home owner works a deal with the mortgage lender to permit a sale for less than the amount owed-and foreclosures are continuing to push home values down, said Dick Riley, Riley & Marks co-owner.

According to last week’s RealtyTrac report, one in 400 homes in Clark County is in foreclosure.

If the homeowner bought the house within the past three years, “The value of the home is now less than they purchased it for,” Riley said.

Thus, the homeowner may well have little or no equity, and can’t refinance without enough equity or cash to make up the difference, said Angelique Harris, a Vancouver mortgage loan officer who works for Vancouver-based Cascade Mortgage & Financial Co. of Washington.

“It’s all pretty much part of the declining market,” she said.

Riley said values have not yet bottomed out for Clark County’s high-end homes, which were once priced in the half-million-dollar to $1 million range.

On the other hand, he said, home values in the $150,000 to $200,000 range are starting to stabilize.

“Newer neighborhoods with higher values still have a long way to go,” Riley said.
That can be hard for some homeowners to believe.

“They think it should be worth the same price they paid for it at the peak of the market,” Riley said, “Especially if they used 100% financing.”

No high-risk lending

No longer available, the risky mortgages were popular during the countywide home-selling boom, between 2004 and August of 2007. It can be a real problem for borrowers who want to refinance now, said Don Lamb, a loan officer with Sierra Pacific Mortgage in Vancouver.

“They’re feeling left out because they can’t get the low interest rate,” said Lamb, who has had to tell a potential client that refinancing wasn’t an option. The customer was a friend who had purchased his home for $250,000 in 2006.

“It is now worth $220,000 and he owes $240,000,” Lamb said. “He’s wondering, why should I stay in my house now and pay more than it’s worth?”

Lamb advises his clients to remain in the home and take advantage of the high interest rate as an income tax write off.

“Hopefully, your investment will pencil out or make you a profit one day. Right now it won’t, because it’s a declining market, but you might as well be happy with your environment,” he said.

The relaxed lending guidelines of the last housing boom also gave rise to subprime mortgages, or loans that did not meet high underwriting standards.

“The parameters of the old loans do not exist anymore,” Grenz said.

The old standards let buyers obtain easy money, despite some having checkered credit histories and incomplete work records.

Higher standards

Today’s home mortgage products require stated income and assets and a credit score of 740 or above, Grenz said.

“The simplest thing to do is to have your income and asset statements available,” he said.

The list includes your last two pay stubs, income tax records and recent retirement, savings and stock market account statements.

Most mortgage brokers say they encourage first-time buyers and refinance applicants to apply for approval.

“We analyze each refinance based on its merit,” said Ed Barbier, mortgage branch manager of Home Street Bank in Vancouver.

He urges first-time home buyers to apply for pre-approval before they start the search for a new home.

“That gets the biggest obstacle out of the way,” Barbier said.

Sitting on the fence

Some potential home buyers don’t believe that mortgage interest rates and home prices have bottomed out, or reached an all-time low, said John Bruce, president of Cornerstone Mortgage Corp. in Lake Oswego.

Bruce said rates, which inched up by 0.25% last week, likely won’t drop much lower, he said, adding that the federal government does not set mortgage rates which are a function of the market and not government controls.

“When Congress talks about doing something to lower the interest rate, that’s not for mortgages,” Bruce said, predicting that rates would continue to hover near 5%. “But you still get a lot of people sitting and waiting.” In the meantime, a lot of people are missing the boat, Bruce said.

“You have a lot of people sitting and waiting for the rates to come down,” he said. “The challenge is, the government doesn’t set (mortgage) rates.”

Copyright © 2009, The Columbian, Vancouver, Wash.
Distributed by McClatchy-Tribune Information Services.

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Fourth Presbyterian scraps condo tower plan

Crain’s) — The Fourth Presbyterian Church of Chicago has given up on its controversial plan to let a developer build a condominium tower next to the historic Michigan Avenue church.

The proposal, unveiled nearly six years ago, faced increasingly long odds, given strong neighborhood opposition and the deteriorating condo market. It was time to move on, Rev. John Buchanan, the church’s pastor, told church members in a Jan. 20 letter.

“The reasons for this decision include the negative political climate, the current economic conditions and our continuing and growing need for more space for church programs,” he wrote.

In 2004 the church selected Glenview-based Edward R. James Partners LLC and Rosemont-based Opus North Corp. to develop a 64-story condo tower next to the Gothic revival church at Chestnut Street and Michigan Avenue. The proposal suffered a major blow about a year later when then-Alderman Burton Natarus (42nd) announced his opposition to the project. The 42nd Ward includes the church.

Fourth Presbyterian tried to revive the plan even after the Opus-Edward James joint venture dropped out, selecting a new team of Chicago-based developers, Mesa Development LLC and Walsh Group. Mesa and Walsh proposed building a condo-and-hotel tower that would have been about as tall as the original high-rise, Rev. Buchanan said in an interview.

But Alderman Brendan Reilly, who unseated Mr. Natarus in 2007, says he rejected the new proposal after meeting with representatives of the church and developers on several occasions. The new plan was nearly identical to the original one and would have only increased traffic in an already gridlocked neighborhood, he says.

The project also lacks the support of local residents.

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chicago – fourth presbyterian scraps – downtown evanston – planned near trump – condo tower plan – sheridan road“Opposition continues to be widespread and vehement,” Mr. Reilly says.

The development was a key part of Fourth Presbyterian’s growth plan because it would have housed about 60,000 square feet of office and meeting space for the church. The church also would have received more than $20 million in the deal, money that would have boosted its endowment and helped finance a new community center on a site it owns at Chicago and Hudson avenues on the Near North Side.

Fourth Presbyterian is starting to work on Plan B to meet its space needs, possibly by constructing a small building for itself on the site.

As for the Chicago Avenue property, “we haven’t even discussed where we go from here,” Rev. Buchanan says. “For the time being, we’ll keep it.”

Chicago South Loop Real Estate

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